Make your money work for you!

Month: December 2014

December was by all counts a super strange month in Bondora. Firstly, I added in significantly more money than usual to hit my investment target and half way through the month the new credit groups got launched which essentially caused chaos in the forums and made investors scramble to figure out a new strategy for investing.

Overall December was a nice month. Despite all the chaos most of the money I added in went out as investments, so as of the end of the month the outstanding principal of loans crossed the 4500€ mark! December also hit another high point for interest earned, finishing the month at 74,92€. There will likely be a nice jump in January since a lot of the last payments that should have been made in December got pushed into January.

Due to the chaos of the new credit groups going out and some of the loan applications being cancelled manually then of course the graph for loans ended up getting really messed up because about 150€ worth of loans went out only to be cancelled. Luckily most of that happened rather quickly, but some money was just sitting under bids with negative returns waiting to be cancelled. Hopefully they manage to get the automatic cancelling of those loans going so they don’t mess up the returns chart. (The repaid principal number gets messed up pretty badly when so many loans bounce, and since the cash flow page is still broken as hell, then Bondora visuals/data are even more useless than usual.)

Loans given out

I let my old portfolio managers work as before while picking some extra loans manually at the end of the month based on the new credit groups. I got quite a few more loans than usual (total of 82), and took in much more Finnish and Spanish than usual since I hand picked some high credit rating loans. I’ve opted to somewhat trust the Bondora rating system but it still has multiple problems with the new portfolio manager that I’ll write about further later on.

Overall the loans given out ended up being like this:

– 0 x AA, 1 x A, 8 x B, 8 x C

– 14 x D, 13 x E, 18 x F, 20 x HR

As you can see, low credit ratings are much more likely. This is going to cause significant issues with the new portfolio managers since people will opt for high grade loans since they want to get good Estonian loans and they don’t trust the credit rating (yet). I’ve been playing around with the numbers of the new manager and I’m not going to opt out of HR loans, but I guess I’ll have to see how easy manual picking will be – at least in December I picked 15 loans manually since they didn’t fill up, likely because many people paused their managers.

As of this December my Bondora portfolio is two years old. Since the new credit ratings were implemented earlier this week, and next week the new portfolio managers will be activated then I thought it would be a good idea to run a sort of a summary about what my portfolio looks like in numbers. I ran the numbers taking into account 24 months of investing (1.Dec 2012-30.Nov 2014). Depending on how exactly the new portfolio managers will work, the next monthly review will likely be in a somewhat different format. So, to send off the old year and to say goodbye to the old credit groups, my portfolio in numbers.

Returns

My portfolio has always had relatively high returns. Looking at the data that Bondora offers they tell me that I’m overall in the top group of investors making 25%+ by the site’s calculations and among people who have invested at least 24 months and more than 5000€ it ranks me 26th.

By my own calculations my results aren’t entirely that good. XIRR calculations made at the end of November show this as a result: While the wildly optimistic results are similar to what the site shows, it’s prudent to keep a calm head. At least the pessimistic scenario keeps getting better, which is that I’m most interested in keeping track of. (This assumes a 25% recovery rate and +3,5% average sales price for current loans).

In numbers this return on my portfolio looks like this: I added in December, since it’s almost over and I can predict the overall returns for that month pretty well already. Looking into the future, I will be breaking the 100€ interest per month limit before summer for sure.

My returns are in line with the overall interest of loans that I have given out. From the visual you can see though why the Bondora system probably needs an overhaul in terms of loan pricing, the interest rates do look a bit unreasonable, and aren’t really well correlated with credit groups:

Portfolio by credit groups

One of the most interesting aspects of the new credit groups going live was of course seeing whether or not your portfolio managers and handpicked loans were actually any good according to Bondora’s information. My portfolio by the old groups looked like this (I didn’t separate countries since I have so few foreign loans, this is a total of ~500 loan pieces):

It looks quite nice, yes? A lot of A1000 loans from the beginning especially. I have liberally added all sorts of credit groups though to keep money moving, so the ratio of A1000 to other loans was constantly dropping and would have dropped below 50% soon. The new credit ratings though show a very different image of my loans: I was actually expecting a higher amount of low credit group loans. Especially when looking at the loan market right now – I have yet to see any AA or A group loans on the open market, and I haven’t received any since the moment that the new groups went live, so it’s reasonable that they’d be rate in my current portfolio as well. Keep in mind though, that the new ratings assess the risk at the moment of the application – this means that you’re likely to have A or B loans that have defaulted and HR loans that are showing awesome discipline.

Defaulted loans and HR loans

Now for the interesting part! Defaults are what concern most people most when starting. This means that A1000 loans look especially tempting because they show awesome payment histories. This is however not the case, and can be seen from my portfolio as well:

As you can see there is a clear issue with the new and old ratings. What’s even more interesting is how for example A1000 loans were over represented among defaults compared to my full portfolio. It is however clear to see, that almost 40% of my defaults are made up by HR loans, so it’s definitely something to look out for. This is the division of my HR loans into old credit groups:

Changes with my Bondora portfolio

Like all investors, I will have to completely remake my portfolio managers, since the new system should theoretically allow you to balance between different credit groups better. It is, however great to see that my portfolio has been doing fine, I hope the new portfolio manager allows me to continue the trend, even though I have accepted the fact that returns will be balancing across the board for investors. It will definitely be an interesting start of the year!

As of last night, Bondora took the first step to push the new credit system live. As of now you can see the old scoring (ABC600-100) alongside the new scoring system (AA A B C D E F HR) on the market. Leaving aside the fact that the update broke a significant part of the functions accidentally and removed some on purpose, how does the new scoring system impact investors?

For those investors who have always invested automatically using portfolio managers very little will change. If you ran a very conservative strategy, which is likely if you have a small portfolio, you can just accept any general portfolio manager setup that Bondora offers you and you’ll be set. Investing will be just as passive as before, and you’ll end up being safer from risk than you are now.

For those like me who do a part of their investing manually and run portfolio managers that are a bit more high risk than the default ones, more is going to change. Firstly, the returns for active investors will likely drop because more market inefficiencies will be eliminated. Secondly, investing will likely become more passive due to less need to scan through data provided because the new system works on partially hidden data, which means that any analysis you are running will be insufficient. Thirdly, there is definitely a lot of potential that once the new scoring is finished, that our portfolios might prove to have some very dangerous combinations of loans, such as a huge portion of HR loans.

Different process of analysis

Due to a lot of data being hidden, then it will be up to the investors to trust Bondora to rate the loans well. For example, if you look at the top 3 Estonian loans listed by potential returns onthe market right now, this is what you see:

12.73 return – HR (A600 unverified – 38%)

9.87 return – B (A1000 verified – 15%)

9.3 return – C (A1000 verified – 15%)

Now, if you look at the 3 worst Estonian loans listed by potential returns on the market right now you see something equally confusing:

0.43 return – HR (A700 income verified – 34%)

1.44 return – HR (A600 unverified – 38%)

3.56 return – D (A1000 verified – 15%)

When looking at such comparisons, it’s clear to see why you need to be able to trust the sytem Bondora made. Just looking at the potential interest or credit group is not enough to be able to predict the risk group a loan falls under. Looking at an ordinary A1000 loan, the different risk factors that Bondora takes into account can make it fall under B, C or D rating while the interest and income is the same, but potential returns for those examples differ by a magnitude of 3 times. Same for the two A600 loans – they are both the top and bottom performers listed on the market currently.

Long term impact

– Social lending will likely become more more passive (at least for me personally)

– Returns will even out for investors (since the rating system should be more transparent)

Other than that, it’s difficult to predict that might happen. The new portfolio manager hasn’t been rolled out yet, so we don’t know exactly how much freedom we have when setting it up (such as, whether you can limit your investments by potential return or just by credit group or by whatever combination of other data.) Whichever way it goes, the new year will start with a lot of portfolio managers being created.

Last night the Women’s Investment club met again and this time our topic was social lending. Since most of the people who came to the even didn’t have much (or any) experience with social lending, I had to really go back to the basics when preparing for the meetup.

How to start?

This was one of the most popular questions – how to get started in the technical sense (as in, how to make an account, how to make portfolio managers) but more so, how to start with the actual investing – which loans to pick and how.

1. I wish I had known to worry a lot less about credit groups and returs and other numbers back when I didn’t really understand how they worked. It’s super easy to get caught up in all sorts of Excel tables and graphs and analyzing your return numbers, but it’s just not all that useful when you lack fundamental knowledge about how the sector works.

2. I wish I had started both earlier and with bigger amounts of money. Even if I had made the same mistakes or more mistakes at start, I would still be enjoying far bigger compounded returns at this point. I spent way too much time paying attention to how my very small portfolio was doing as opposed to focusing on how to increase it.

3. I wish I had found people who shared similar interests way back when I was starting. It’s been pure chance that I stumbled onto other people who shared an interest in social lending, and I think we have all learned a lot from each other’s ideas and thoughts. In that sense all the women in our investment club are super lucky – there is a lot of knowledge on offer if you just ask.

What to do if you’re just now starting?

1. Make your first 1-5 small investments into Estonian loans and just follow their progress and assess your risk tolerance based on how nervous you get and how often you log on to check on your loans. (Spending time on reading up on theory will not give you any extra magical returns on these first investments.)

2. Focus on increasing your savings or your income to be able to invest more money monthly. With social lending every 5 euros saved will help! Once you have some money in your emergency fund then start planning for how much money you want to invest into social lending each month.

3. Read up on some of the wealth of knowledge that has been written about social lending in the past few years. Look at blogs that show real numbers so you can estimate what your portfolio will look like in the future. Don’t get too carried away with this – it isn’t worth reading 5 hours if you’re investing 100 euros.

4. Find an investing buddy! This is super important because having a friend with similar interests will both motivate you to keep going, you can share interesting bits of info and learn from each other’s mistakes. Going to different meetups to hear other people helps you keep track of what’s happening as well.

5. Focus on slowly increasing your portfolio while keeping in mind that your first priority is to diversify your portfolio to at least a few hundred loans. Get a feel how different risk levels work for you – it’s ok to make small investments into riskier loans if you want to try them out. Just keep in mind – the closer you keep to “boring” investment strategies, the more stable your returns.

November wasn’t a particularly exciting month in social lending. Due to upcoming changes to credit scoring systems in Bondora it seems that there is a kind of an air of expectation from the investors’ side on how the changes will be implemented. The most important point of the change seems to be the fact that returns will likely drop for more selective investors and rise for investors who don’t analyze the data. This potentially means that managing a Bondora portfolio will become much more passive, but time will tell.

Overall November was a good month. A lot of rescheduled loans started paying again, so the interest return for Bondora was once again an all time high, ending up at 71,93€. (6,4 euros more than for October.) December will likely be a slow month due to a lot of payments being pushed into next year, but the 100€ interest goal is coming closer quite quickly.

It’s also interesting to see how Bondora compares you to other investors. I’ve always had relatively high returns, the site still shows my returns at 25% but it has now very slowly started to drop, so I’ll have to see how this number starts changing when the new credit group system becomes active.

Overall, I had a lot of loans go out in November. The biggest change was the fact that I actively started to take in B+ loans, and instead of picking them manually I just added a portfolio manager to take in 10 B+ loans every month. Since the amount of loans I’m giving out is slowly increasing every month then diversification starts becoming an issue since I don’t want to put too much money into A1000 loans compared to other loan pieces.

The total for loans given out in November:

40 loans in total (1 Spanish, 2 Finnish, 37 Estonian loans).

Out of the Estonian loans 10 were B+ and 27 were verified.

Out of the verified loans the breakdown was:

– 3xA1000, 3xB1000, 7xC1000

– 4×900, 3×800, 2×700, 5×600.

As you can see, not a particularly great month for 1000 credit group loans. B+ loans have proven themselves over time though, so I’m expecting to let their number increase maybe to 15% of my overall portfolio. Also, defaulted loans are really starting to get some sort of a rhythm when it comes to making payments, about 1/3 of my defaulted loans that are at least half a year old are making some payments so that’s good to see at last.